McDonald's meets expectations as profit jumps

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By CANDICE CHOI, Associated Press

NEW YORK (AP) — McDonald's ever-evolving mix of affordable menu items and new offerings like the Chicken McBites is helping the chain solidify its dominance in the fast-food industry.

The world's biggest hamburger chain said Friday that its net income rose 5 percent in the first quarter, in line with Wall Street expectations.

McDonald's Corp. said global sales rose 7.3 percent at stores open at least 13 months, driven by gains from all regions. The figure is key metric because it excludes the impact of newly opened stores. In April, the fast food chain expects the figure to increase another 4 percent.

A big part of the McDonald's success story in recent years has been the company's emphasis on affordability, combined with the rollout of popular items such coffee frappes and fruit smoothies that have high profit margins and attract diners throughout the day. Customers squeezed by the economic downturn also love them because it's a way to have a treat for a couple of bucks.

In the coming weeks, Chief Operating Officer Don Thompson said McDonald's plans to add to its lineup of specialty drinks with a new "Cherry Berry Chiller" iced drink.

Although McDonald's has consistently outperformed its rivals, the chain is facing the same pressures from rising commodity costs that are hitting the entire industry. Costs for labor and rent are also increasing in some overseas markets.

McDonald's expects costs for ingredients to increase 4.5 percent to 5.5 percent this year, which would be roughly in line with last year's increases. But rather than passing on those costs outright to customers, McDonald's is adjusting its pricing in a more nuanced way.

Last month, for example, McDonald's removed items like small soft drinks from its popular Dollar Menu in the U.S. To continue its emphasis on affordability, it introduced an Extra Value Menu with items that have higher profit margins, such as the chicken snack wraps.

Overall, McDonald's also nudged up prices by 1 percent in February. That's on top of the 3 percent price hike last year. Chief Financial Officer Peter Bensen said in a conference call with investors that the company would have to proceed cautiously with any additional price hikes.

Outgoing CEO Jim Skinner, who will be replaced by Thompson in July, noted that the company's mantra of providing value has been the foundation for its success since the Dollar Menu was introduced a decade ago.

"We always have to have everyday affordability," Skinner said.

The strategy has paid off; McDonald's share of the market among hamburger chains was 49.6 percent last year, up from about 41.6 percent a decade ago, according to food industry researcher Technomic Inc.

Smaller rivals Burger King and Wendy's meanwhile have had declining market share. Both are now trying to revive their brands. Burger King, for example, introduced 10 new menu items earlier this month, many of which mimic offerings at McDonald's.

Without naming specific chains, Skinner dismissed the latest efforts from competitors.

"It's not our first rodeo regarding this. They have spurts of enthusiasm for their brand, typically when there's a change in ownership," he said.

For the first three months of the year, McDonald's reported a profit of $1.27 billion, or $1.23 per share. That compares with a profit of $1.21 billion, or $1.15 per share, in the year-ago period.

The total guest count, which is based on total transactions, rose 4.8 percent in the quarter, even as the broader industry has seen limited growth.

In the U.S., sales rose 8.9 percent at restaurants open at least 13 months, as new items like Chicken McBites, updated restaurants and warm weather drew customers. The results also benefitted from an extra day in the Leap Year.

McDonald's said sales in Europe, its biggest market, rose 5 percent despite economic turmoil and severe weather in many parts of the region. Sales rose 5.5 percent in the Asia Pacific, Middle East and Africa region, where the company is focusing its expansion efforts in the coming years.

In 2012, McDonald's said it expects general, administrative expenses to increase about 6 percent as a result to technology investments, costs related to a franchisee convention and its sponsorship of the summer Olympics in London.

The company's income tax rate for the quarter rose to 31.4 percent, up from 28.8 percent a year ago. The full year rate is projected to be between 31 and 33 percent.

Shares of McDonald's, based in Oak Brook, Ill., gained 66 cents to close at $95.94 Friday.

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